Sharmalee Goonew Ardene v. ADP, LLC

Opinion of the Court by Cantil-Sakauye, C. J.

Under the Labor Code, an employee who believes he or

she has not been paid the wages due under the applicable labor

statutes and wage orders may bring a civil action against his

or her employer. (See, e.g., Lab. Code, § 1194; Martinez v.

Combs (2010) 49 Cal.4th 35, 49-51; see also Lab. Code, § 2699.)

This case presents the question whether, when an employer

hires an independent payroll service provider (hereafter

payroll company) to take over all the payroll tasks that would

otherwise be performed by an internal payroll department, the

employee may bring a civil action against not only his or her

employer but against the payroll company as well.

The Court of Appeal, while agreeing with prior appellate

court decisions that a payroll company cannot properly be

considered an employer of the hiring business’s employee that

may be liable under the applicable labor statutes for failure to

pay wages that are due, held that the employee may

nonetheless maintain causes of action for unpaid wages

against the payroll company for (1) breach of the payroll

company’s contract with the employer under the third party

beneficiary doctrine, (2) negligence, and (3) negligent

misrepresentation. We granted review to determine the

validity of the Court of Appeal’s conclusions with respect to

these three causes of action.

GOONEWARDENE v. ADP, LLC

Opinion of the Court by Cantil-Sakauye, C. J.

2

For the reasons discussed hereafter, we disagree with the

Court of Appeal’s conclusion as to each of the proposed causes

of action.

First, we conclude that the Court of Appeal erred in

holding that an employee may maintain a breach of contract

action against the payroll company under the third party

beneficiary doctrine. As explained, under California’s third

party beneficiary doctrine, a third party — that is, an

individual or entity that is not a party to a contract — may

bring a breach of contract action against a party to a contract

only if the third party establishes not only (1) that it is likely to

benefit from the contract, but also (2) that a motivating

purpose of the contracting parties is to provide a benefit to the

third party, and further (3) that permitting the third party to

bring its own breach of contract action against a contracting

party is consistent with the objectives of the contract and the

reasonable expectations of the contracting parties.

Here, we conclude that whether or not a contract

between an employer and a payroll company will in fact

generally benefit employees with regard to the wages they

receive, providing a benefit to its employees with regard to the

wages they receive is ordinarily not a motivating purpose of

the contracting parties. Instead, the relevant motivating

purpose of the contracting parties is to provide a benefit to the

employer. In addition, permitting each employee to name the

payroll company as an additional defendant in any wage and

hour lawsuit an employee may pursue would impose

considerable litigation defense costs on the payroll company

that inevitably would be passed on to the employer through an

increased cost of the payroll company’s services, a result that

would not be consistent with the objectives of the contract and

GOONEWARDENE v. ADP, LLC

Opinion of the Court by Cantil-Sakauye, C. J.

3

the reasonable expectations of the employer or payroll

company. Accordingly, we conclude that an employee should

not be viewed as a third party beneficiary who may maintain

an action against the payroll company for an alleged breach of

the contract between the employer and the payroll company

with regard to the payment of wages.

Second, we conclude that the Court of Appeal also erred

in determining that an employee who alleges that he or she

has not been paid wages that are due may maintain tort causes

of action for negligence and negligent misrepresentation

against a payroll company. As we explain, in light of a variety

of policy considerations that are present in the wage and hour

setting, we conclude that it is neither necessary nor

appropriate to impose upon a payroll company a tort duty of

care with regard to the obligations owed to an employee under

the applicable labor statutes and wage orders and

consequently that the negligence and negligent

misrepresentation causes of action lack merit.

Accordingly, we conclude that the decision of the Court of

Appeal should be reversed insofar as it held that plaintiff

employee in this case may proceed against defendant payroll

company on causes of action for breach of contract, negligence,

and negligent misrepresentation.

I. FACTS AND PROCEEDINGS BELOW

A. Trial Court Proceedings

In April 2012, plaintiff Sharmalee Goonewardene

(plaintiff) filed the initial complaint in the underlying

proceeding against her former employer, Altour International,

Inc. (Altour), alleging causes of action for wrongful

termination, breach of contract, violations of the Labor Code

GOONEWARDENE v. ADP, LLC

Opinion of the Court by Cantil-Sakauye, C. J.

4

and related causes of action. The complaint alleged that

Altour failed to pay plaintiff the wages she was due under the

Labor Code and applicable wage order and wrongfully

terminated her when she brought this failure to Altour’s

attention.

After the trial court sustained a number of demurrers

with leave to amend, plaintiff filed a fourth amended complaint

(4AC). In addition to the numerous claims against Altour, the

4AC included a new, single cause of action against ADP, LLC

(ADP), a payroll company that provided payroll services to

Altour,

1

alleging that ADP had engaged in unfair business

practices under the Unfair Competition Law based on its

alleged failure to provide plaintiff with adequate

documentation and records regarding her compensation.

After ADP demurred to the 4AC, plaintiff notified the

court that she wanted to assert additional claims against ADP,

and the court deferred ruling on ADP’s demurrer to the 4AC to

permit plaintiff to file a motion for leave to file a fifth amended

complaint (5AC). Plaintiff thereafter filed such a motion,

indicating that she intended to assert claims of wrongful

termination, breach of contract, unfair business practices, false

advertising, negligence, and negligent misrepresentation

against Altour and ADP. The trial court then sustained ADP’s

demurrer to the 4AC and its opposition to the motion for leave



1

In addition to ADP, LLC, subsequent complaints also

named as defendants the related entities of ADP Payroll

Services, Inc. and AD Processing, LLC. For convenience we

refer to all of the related payroll company defendants as ADP.

GOONEWARDENE v. ADP, LLC

Opinion of the Court by Cantil-Sakauye, C. J.

5

to file a 5AC with regard to any claim that was based on the

premise that ADP could properly be considered a joint

employer of plaintiff but permitted plaintiff to file a 5AC on the

remaining claims.

Thereafter, plaintiff filed a 5AC, but notwithstanding the

trial court’s prior ruling, the 5AC included claims based on

ADP’s alleged status as a joint employer of plaintiff as well as

additional claims based on other legal theories. In June 2015,

the trial court sustained ADP’s demurrer to the 5AC without

leave to amend with regard to all causes of action and directed

ADP to prepare a final order reflecting its ruling.

While that order was pending, plaintiff submitted a

motion for reconsideration and for permission to file a sixth

amended complaint (6AC) that closely resembled the 5AC but

included a few additional factual allegations. In August 2016,

without explicitly ruling on the motion for reconsideration and

permission to file the 6AC, the trial court entered a final order

sustaining ADP’s demurrer to the 5AC on all causes of action

without leave to amend. The trial court subsequently entered

a judgment dismissing plaintiff’s action against ADP.

B. Court of Appeal Decision

On appeal of the dismissal of the action against ADP, the

Court of Appeal confined its review to the question whether the

trial court had erred in sustaining ADP’s demurrer to the 5AC

without leave to amend, effectively denying plaintiff the

opportunity to have the allegations contained in the proposed

6AC considered to determine whether those allegations are

sufficient to state causes of action. (Goonewardene v. ADP,

LLC (2016) 5 Cal.App.5th 154, 163-164 (Goonewardene).)

Inasmuch as plaintiff’s appellate briefs did not address the

GOONEWARDENE v. ADP, LLC

Opinion of the Court by Cantil-Sakauye, C. J.

6

validity of the claims raised in the 5AC, the Court of Appeal

focused its attention solely on the facts alleged in the 6AC to

determine whether they supported any of the causes of action

asserted in the 6AC. (Id. at p. 163.)

Because it is important to an understanding of the scope

of the Court of Appeal’s holding, we quote in full the Court of

Appeal’s recitation of the facts alleged in the 6AC on which its

decision was based:

2

“ADP is a payroll services provider. Since 2000, ADP’s

advertising and corporate statements have stated that it

provides payroll-related services to employers and employees.

ADP offers to ‘serve as an extension of [an employer’s] payroll

department and [to] take over all [the employer’s] payroll

tasks.’ ADP holds itself out as possessing specialized

knowledge regarding the calculation of wages under applicable

wage laws and regulations, and states that it ‘can save

employer[s] money by calculating their payroll.’ ADP’s Web

site advertises its expertise in tracking employee work hours,

determining wages, and preparing payrolls in accordance with

applicable laws. According to the Web site, ADP provides



2

In a footnote, the Court of Appeal noted with regard to its

statement of facts: “We observe that the prolix and poorly

organized 6AC ignores the rule that ‘the complaint must

contain a statement of the facts in ordinary and concise

language . . . .’ [Citation.] In such cases, we ‘disregard any

defects in the pleading which do not affect the substantial

rights of the parties,’ and assess whether ‘there are averments

of ultimate facts sufficient to constitute a cause of action . . . .’

[Citation.]” (Goonewardene, supra, 5 Cal.App.5th at p. 164,

fn. 3.)

GOONEWARDENE v. ADP, LLC

Opinion of the Court by Cantil-Sakauye, C. J.

7

‘ “self-service tools” ’ allowing employees to view their

attendance, vacation benefits, and time card approvals.

“At some point, ADP entered into an unwritten contract

with Altour, which provides travel-related services. Under

that agreement, ADP calculated payrolls, maintained employee

records, offered legal advice, and provided other wage-related

services for the benefit of Altour and its employees. According

to the 6AC, ADP entered into ‘a partnership or joint venture

with Altour for the purpose of handling Altour’s payroll and

maintaining records and confidential information regarding

Altour’s employees.’ (Underscoring omitted.)

“[Plaintiff’s] ethnicity is Sinhalese and her nationality is

Sri Lankan. In November 2005, [plaintiff] began her

employment with Altour. She answered telephones, made

airline, automobile, and hotel reservations, and issued

electronic tickets and refunds. Because she worked on teams

that provided services ‘24 hours a day 365 days of the year,’

she accrued overtime hours. [Plaintiff] ‘logged directly into an

ADP system to track her earnings.’

“From 2005 to 2012, [plaintiff] did not receive the

compensation due her, including overtime compensation, and

she was denied meal and rest breaks required under Labor

Code section 226.7. . . .

“Under ADP’s agreement with Altour, the 6AC alleges,

ADP maintained [plaintiff’s] earnings records, added the hours

on her time cards, calculated her earnings, and provided her

with an earnings statement. ADP also was responsible for

determining whether appellant was to receive, inter alia,

overtime or double time (that is, overtime reflecting a doubled

hourly rate of pay), in accordance with applicable labor laws.

GOONEWARDENE v. ADP, LLC

Opinion of the Court by Cantil-Sakauye, C. J.

8

ADP alone was responsible for maintaining [plaintiff’s] records

relating to her compensation, adding the hours shown on her

time cards, and applying the labor laws to determine her

wages.

“ADP failed to act with ‘even scant care’ in calculating

[plaintiff’s] wages. (Underscoring omitted.) Her earnings

statements provided by ADP never contained a breakdown of

her regular hours, overtime hours or double overtime hours,

and did not reflect data regarding meal and rest breaks.

Although her time cards reflected facts requiring the payment

of double-time compensation, she received no such payment.

She was paid twice a month on a basis that was intentionally

confusing and did not comply with the wage orders of the

Industrial Welfare Commission (IWC). According to the 6AC,

Altour and ADP knew that [plaintiff] was not being paid in

accordance with California law.

“[Plaintiff] reasonably relied on the earnings statements

provided to her. In 2010, she noticed disparities between her

own bookkeeping and her hours worked, as shown on her

paychecks. In January 2012, she was terminated. According

to the 6AC, she was terminated ‘on a pretext and in retaliation

for [her] efforts to be paid fairly and to receive those benefits to

which she was legally entitled.’ ” (Goonewardene, supra,

5 Cal.App.5th at pp. 164-166, fn. omitted.)

After setting forth these facts, the Court of Appeal

initially held that insofar as any of plaintiff’s proposed causes

of action against ADP in the 6AC rested on the theory that

ADP could properly be viewed as a joint employer of plaintiff,

the causes of action were without merit. (Goonewardene,

supra, 5 Cal.App.5th at pp. 166-171.) In this regard, the Court

GOONEWARDENE v. ADP, LLC

Opinion of the Court by Cantil-Sakauye, C. J.

9

of Appeal relied upon the appellate court decision in Futrell v.

Payday California, Inc. (2010) 190 Cal.App.4th 1419, which

held that a payroll company could not properly be found to be

an employer of the hiring company’s employees either for

purposes of California wage orders and labor statutes or under

the federal Fair Labor Standards Act (FLSA). (Goonewardene,

supra, 5 Cal.App.5th at pp. 166-170.)

The Court of Appeal went on to hold, however, that “the

proposed 6AC adequately pleads claims [against ADP] for

breach of contract, negligent misrepresentation, and negligence

based on allegations that [ADP] performed payroll services for

[plaintiff’s] benefit in an inaccurate and negligent manner.”

(Goonewardene, supra, 5 Cal.App.5th at p. 162.)

As explained more fully below, the Court of Appeal’s

conclusion that the 6AC adequately states a cause of action by

plaintiff against ADP for breach of contract rested on its

determination that the allegations were sufficient to

demonstrate that, under the governing California third party

beneficiary doctrine, plaintiff could properly be found to be a

third party beneficiary of the contract between Altour and

ADP. (Goonewardene, supra, 5 Cal.App.5th at pp. 171-174.)

The Court of Appeal stated in this regard: “[W]hen an

employer enters into a contract with a service provider by

which the provider is to take over the employer’s payroll tasks,

including the preparation of the payrolls themselves, the

employees constitute third party creditor beneficiaries of the

contract between the employer and service provider.

[Citations.] . . . The gravamen of [the 6AC’s] allegations is that

Altour engaged ADP to discharge Altour’s wage-related legal

duties to its employees, that is, Altour’s obligations under the

Labor Code and applicable wage orders to accurately calculate

GOONEWARDENE v. ADP, LLC

Opinion of the Court by Cantil-Sakauye, C. J.

10

employees’ wages, fully distribute those wages in a timely

manner, and provide employees with accurate earnings

statements.” (5 Cal.App.5th at p. 173.)

Thereafter, in analyzing the causes of action for negligent

misrepresentation and negligence, the Court of Appeal found

the allegations in the 6AC sufficient to support such tort

causes of action, relying in part on its prior determination that

plaintiff qualified as a third party beneficiary of the

Altour/ADP contract. (Goonewardene, supra, 5 Cal.App.5th at

pp. 177, 181-183.)

Accordingly, while the Court of Appeal affirmed the trial

court judgment in favor of ADP with regard to all causes of

action other than the causes of action for breach of contract,

negligent misrepresentation and negligence, it reversed the

trial court judgment “to the extent the trial court denied

[plaintiff] leave to file an amended complaint asserting claims

against [ADP] limited to breach of contract, negligent

misrepresentation, and negligence.” (Goonewardene, supra,

5 Cal.App.5th at p. 189.)

ADP sought review of the Court of Appeal decision

insofar as the decision held that plaintiff’s suit against ADP

may go forward with respect to the causes of action for breach

of contract, negligent misrepresentation and negligence. We

granted review to consider the validity of the Court of Appeal’s

decision regarding these three causes of action.

GOONEWARDENE v. ADP, LLC

Opinion of the Court by Cantil-Sakauye, C. J.

11

II. UNDER CALIFORNIA’S THIRD PARTY BENEFICIARY

DOCTRINE, IS PLAINTIFF PROPERLY CONSIDERED

A THIRD PARTY BENEFICIARY OF THE CONTRACT

BETWEEN HER EMPLOYER AND ADP?

We turn first to the Court of Appeal’s conclusion that

plaintiff may maintain a cause of action for breach of contract

against ADP.

As noted, the 6AC alleges that Altour, plaintiff’s

employer, entered into an unwritten contract with ADP “for

the benefit of Altour and its employees” under which ADP was

to perform all of the payroll services for Altour, including

maintaining its employees’ earnings records, adding hours on

their time cards, calculating their wages under the applicable

labor laws, and preparing the paychecks and pay stubs for the

employees. The 6AC further alleges that ADP failed to comply

with its obligations under the contract by negligently failing to

provide plaintiff with paychecks and pay stubs that accurately

reflected the wages she was due under the applicable labor

statutes and wage orders. The Court of Appeal agreed with

plaintiff that the allegations in the 6AC are sufficient to

support a breach of contract action by plaintiff against ADP

under the third party beneficiary doctrine. (Goonewardene,

supra, 5 Cal.App.4th at pp. 171-174.)

In California, as in other jurisdictions, it is well

established that under some circumstances a third party may

bring an action for breach of contract based upon an alleged

breach of a contract entered into by other parties. Civil Code

section 1559, enacted as one of the provisions of the original

1872 Civil Code, declares: “A contract, made expressly for the

benefit of a third person, may be enforced by him at any time

GOONEWARDENE v. ADP, LLC

Opinion of the Court by Cantil-Sakauye, C. J.

12

before the parties thereto rescind it.” Section 1559 has not

been amended since its enactment in 1872.

As we shall see, the fact that Civil Code section 1559 was

adopted as part of the original 1872 Civil Code is quite

significant. In Li v. Yellow Cab Co. (1975) 13 Cal.3d 804 (Li),

this court explained at some length that the provisions of the

original Civil Code that were enacted in 1872 to codify the

then-existing common law rules were not intended to freeze

the common law doctrines in the form they were understood in

1872 but rather contemplated the possibility of future judicial

development of such doctrines, as was true of common law

rules generally. (Id. at pp. 814-823.) In Li, the specific

question before the court was whether Civil Code section 1714,

which set forth the common law doctrine of contributory

negligence under which a plaintiff’s negligent conduct operated

to completely bar any recovery by the plaintiff against a

negligent defendant, should properly be interpreted to preclude

this court from adopting as a common law rule the doctrine of

comparative negligence under which a plaintiff’s negligence

reduces, but does not totally bar, a plaintiff’s recovery against

a negligent defendant. This court concluded that section 1714

should not properly be interpreted to preclude this court from

adopting comparative negligence as the prevailing California

common law rule. The court explained: “[I]t was not the

intention of the Legislature in enacting section 1714 of the

Civil Code, as well as other sections of that code declarative of

the common law, to insulate the matters therein expressed

from further judicial development; rather it was the intention

of the Legislature to announce and formulate existing common

law principles and definitions for purposes of orderly and

concise presentation and with a distinct view toward

GOONEWARDENE v. ADP, LLC

Opinion of the Court by Cantil-Sakauye, C. J.

13

continuing judicial evolution.” (13 Cal.3d at p. 814, italics

added.)

Civil Code section 1559 — setting forth California’s third

party beneficiary doctrine — is one of the “other sections” of

the original 1872 Civil Code referred to in Li that was

declarative of the common law and was not intended “to

insulate the matters therein expressed from further judicial

development.” (Li, supra, 13 Cal.3d at p. 814.) California

decisions, applying the third party beneficiary doctrine in a

variety of circumstances since 1872, have understood section

1559 in just this fashion, and have not viewed the provision as

restricting California’s third party beneficiary doctrine to the

common law rule as it existed in 1872. (See, e.g., Martinez v.

Socoma Companies, Inc. (1974) 11 Cal.3d 394, 400-407

(Socoma Companies) [looking in part to third party beneficiary

principles set forth in subsequently adopted Restatements of

Contracts]; Lucas v. Hamm (1961) 56 Cal.2d 583, 590 [noting

effect of section 1559 is simply “to exclude enforcement by

persons who are only incidentally or remotely benefited”].)

Accordingly, we must determine whether, under the

circumstances at issue here, plaintiff is entitled to bring an

action against ADP for its alleged breach of its contract with

Altour under the common law third party beneficiary doctrine

as reflected in the current governing California decisions.

From the beginning of the twentieth century, virtually all

American courts applying common law contract principles have

recognized that it is appropriate under some circumstances to

permit an individual or entity that is not a party to a contract

to bring an action to enforce the contract. (See, e.g., Eisenberg,

Third-Party Beneficiaries (1992) 92 Colum. L.Rev. 1358, 1371-

1374 (Eisenberg).) Courts have struggled, however, to

GOONEWARDENE v. ADP, LLC

Opinion of the Court by Cantil-Sakauye, C. J.

14

formulate useful, general principles to identify those

circumstances in which a third party should be permitted to

maintain an action for an alleged breach of a contract to which

it is not a contracting party, as distinguished from the usual

instance in which only the contracting parties may bring an

action under the contract. (See, e.g., Crawford, Chief Justice

Wright and the Third Party Beneficiary Problem (1977)

4 Hastings Const. L.Q. 769, 771-772 [“Few areas of contract

law have consistently raised more thorny theoretical and

practical difficulties for lawyers, judges, and scholars than the

rights of nonparties to enforce contractual promises”].)

In the first Restatement of Contracts, published in 1932,

the drafters divided the cases that had found that third parties

were entitled to enforce a contract into two categories: one

involving so-called “creditor beneficiaries” and the other

involving so-called “donee beneficiaries.” (See Rest. Contracts,

§ 133 (Restatement First).)3

When the Restatement Second of



3 The classic creditor-beneficiary case involved a contract

between party A and party B, in which A, in return for some

consideration, promised party B that it would pay a preexisting

debt that party B owed to nonparty T; in that setting, if A had

not fulfilled its promise, courts permitted T to sue A to enforce

the promise. (See, e.g., Lawrence v. Fox (1859) 20 N.Y. 268 [in

contract between Holly and Fox, Fox, in return for a loan from

Holly of $300, promised to pay $300 to Lawrence in satisfaction

of a preexisting debt that Holly owed Lawrence; in subsequent

suit, Lawrence was permitted to sue Fox for the $300].) The

classic donee-beneficiary case involved a contract in which

party A, in return for some consideration, promised party B

that it would pay nonparty T a sum that B wished to give to T

as a gift; if A failed to fulfill its promise, T was permitted to

GOONEWARDENE v. ADP, LLC

Opinion of the Court by Cantil-Sakauye, C. J.

15

Contracts (Restatement Second) was adopted in 1979, the

drafters concluded that “the terms ‘donee’ beneficiary and

‘creditor’ beneficiary carry overtones of obsolete doctrinal

difficulties” (Rest.2d Contracts, ch. 14, Introductory Note,

p. 439) and avoided those terms. Instead, under the

Restatement Second, a third party beneficiary who is entitled

to enforce a contract entered into between other parties is

designated an “intended beneficiary.” (Rest.2d Contracts,

§ 302(1).) Although the Restatement Second retained traces of

the creditor-beneficiary and donee-beneficiary categories (id.,

§ 302(1)(a), (1)(b)), it refocused the principal inquiry regarding

whether a third party beneficiary should be considered an

intended beneficiary on the question whether “recognition of a

right to performance in the beneficiary is appropriate to

effectuate the intention of the [contracting] parties.” (Id.,

§ 302(1).)

Although our past decisions have at times referred to and

invoked the creditor-beneficiary and donee-beneficiary labels

(see, e.g., Socoma Companies, supra, 11 Cal.3d at pp. 400-401),

this court has not relied primarily on those categories or the

Restatement formulations in the numerous cases in which we



sue A to enforce the promise. (See, e.g., Seaver v. Ranson (N.Y.

1918) 120 N.E. 639 [just prior to wife’s death, husband

promised wife that if she left her house to him for his life, he

would alter his will to leave a sum of money to her niece; when

husband, after obtaining the house for his lifetime, later died

without altering his will, niece was permitted to sue the

executor of husband’s estate to enforce husband’s promise to

wife].)

GOONEWARDENE v. ADP, LLC

Opinion of the Court by Cantil-Sakauye, C. J.

16

have discussed and applied the third party beneficiary

doctrine.4

Instead, a review of this court’s third party

beneficiary decisions5

reveals that our court has carefully



4 A number of academic commentators have identified a

variety of problems and failings in the Restatement

formulations of the third party beneficiary doctrine. (See, e.g.,

Eisenberg, supra, 92 Colum. L.Rev. at pp. 1376-1384; Prince,

Perfecting the Third Party Beneficiary Standing Rule Under

Section 302 of the Restatement (Second) of Contracts (1984) 25

B.C. L.Rev. 919, 990-995; Summers, Third Party Beneficiaries

and the Restatement (Second) of Contracts (1982) 67 Cornell

L.Rev. 880, 891-899.)

5 See Martinez v. Combs, supra, 49 Cal.4th at p. 77

[farmworkers could not recover unpaid wages from produce

merchants who regularly purchased produce from the

farmworker’s employer on the theory that the workers were

third party beneficiaries of the employer/merchant contract];

Hess v. Ford Motor Co. (2002) 27 Cal.4th 511, 524-528

[defendant car manufacturer was not entitled, under the third

party beneficiary doctrine, to obtain the benefit of an earlier

broad contractual release of liability entered into between the

plaintiff and another potential defendant]; Garcia v. Truck Ins.

Exchange (1984) 36 Cal.3d 426, 436-438 [private doctor who

performed surgery at hospital but was not employed by the

hospital was not entitled, under the third party beneficiary

doctrine, to obtain coverage under the insurance policy issued

by insurance company to hospital]; Murphy v. Allstate Ins. Co.

(1976) 17 Cal.3d 937, 940-944 [injured claimant was not

entitled to sue tortfeasor’s insurer, under third party

beneficiary doctrine, for breach of the insurer’s duty to settle

under the insurer’s contract with the tortfeasor, in the absence

of an assignment of such a cause of action by the insured

tortfeasor to the claimant]; Socoma Companies, supra,

11 Cal.3d 394, 400-407 [plaintiffs, unemployed persons who

received government-funded job training from defendant

GOONEWARDENE v. ADP, LLC

Opinion of the Court by Cantil-Sakauye, C. J.

17

examined the express provisions of the contract at issue, as

well as all of the relevant circumstances under which the

contract was agreed to, in order to determine not only

(1) whether the third party would in fact benefit from the

contract, but also (2) whether a motivating purpose of the

contracting parties was to provide a benefit to the third party,

and (3) whether permitting a third party to bring its own

breach of contract action against a contracting party is

consistent with the objectives of the contract and the

reasonable expectations of the contracting parties. All three



companies but failed to obtain promised employment, were not

entitled to bring suit for damages against defendants, under

third party beneficiary doctrine, for defendants’ alleged breach

of their contract with the federal government to provide such

job training and employment]; Lucas v. Hamm, supra, 56

Cal.2d 583, 589-591 [intended beneficiaries of a will, who failed

to obtain inheritance due to alleged negligence of attorney who

drafted the will, were entitled to sue the attorney, under the

third party beneficiary doctrine, for attorney’s alleged breach of

contract with testator]; Brown v. Superior Court (1949) 34

Cal.2d 559, 564-565 [where husband and wife agreed to make

mutual wills in favor of intended devisees, those devisees were

entitled, under third party beneficiary doctrine, to bring suit to

enforce agreement]; Hartman Ranch Co. v. Associated Oil Co.

(1937) 10 Cal.2d 232, 244-249 (Hartman Ranch) [adjacent

landowner, whose subsurface oil was improperly drained by

sublessee’s drilling, was entitled to sue sublessee, under third

party beneficiary doctrine, for sublessee’s alleged breach of its

obligations under the lease and sublease]; Calhoun v. Downs

(1931) 211 Cal. 766, 770-771 [broker was entitled, under third

party beneficiary doctrine, to enforce promisor’s agreement to

assume promisee’s obligation to pay broker’s commission].

GOONEWARDENE v. ADP, LLC

Opinion of the Court by Cantil-Sakauye, C. J.

18

elements must be satisfied to permit the third party action to

go forward.

With regard to the second element, we note that our past

cases have sometimes referred to this element of the third

party beneficiary doctrine as a requirement that the “purpose”

of the contract be to benefit the third party (see, e.g., Lucas v.

Hamm, supra, 56 Cal.2d at pp. 589-590) and sometimes as a

requirement that there be “an intent to benefit” the third party

(see, e.g., id. at p. 591; Murphy v. Allstate Ins. Co., supra,

17 Cal.3d at p. 944; Garcia v. Truck Ins. Exchange, supra,

36 Cal.3d at p. 436.) Because of the ambiguous and potentially

confusing nature of the term “intent” (see Eisenberg, supra,

92 Colum. L.Rev. at p. 1378), this opinion uses the term

“motivating purpose” in its iteration of this element to clarify

that the contracting parties must have a motivating purpose to

benefit the third party, and not simply knowledge that a

benefit to the third party may follow from the contract. To

avoid any possible confusion, however, we emphasize that our

intent-to-benefit caselaw remains pertinent in applying this

element of the third party beneficiary doctrine.

With regard to the third element, we observe that

academic commentators have pointed out that the parties to a

contract are typically focused on the terms of performance of

the contract rather than on the remedies that will be available

in the event of a failure of performance (see, e.g., Eisenberg,

supra, 92 Colum. L.Rev. at p. 1388), and that our cases have

not required a showing that the contracting parties actually

considered the third party enforcement question as a

prerequisite to the applicability of the third party beneficiary

doctrine. (See, e.g., Lucas v. Hamm, supra, 56 Cal.2d at

pp. 589-591; Hartman Ranch, supra, 10 Cal.2d at pp. 244-246.)

GOONEWARDENE v. ADP, LLC

Opinion of the Court by Cantil-Sakauye, C. J.

19

Accordingly, the third element does not focus upon whether the

parties specifically intended third party enforcement but

rather upon whether, taking into account the language of the

contract and all of the relevant circumstances under which the

contract was entered into, permitting the third party to bring

the proposed breach of contract action would be “consistent

with the objectives of the contract and the reasonable

expectations of the contracting parties.” (Ante, p. 17.) In other

words, this element calls for a judgment regarding the

potential effect that permitting third party enforcement would

have on the parties’ contracting goals, rather than a

determination whether the parties actually anticipated third

party enforcement at the time the contract was entered into.

Furthermore, the requirement in the third element that

third party enforcement be consistent with “the objectives of

the contract” is comparable to the inquiry, proposed in

Professor Eisenberg’s article, regarding whether third party

enforcement will effectuate “ ‘the contracting parties’

performance objectives,’ ” namely “those objectives of the

enterprise embodied in the contract, read in the light of

surrounding circumstances . . . .” (Eisenberg, supra, 92 Colum.

L.Rev. at p. 1385, original emphasis; see also Rest.2d

Contracts, § 302(1) [“a beneficiary of a promise is an intended

beneficiary if recognition of a right to performance in the

beneficiary is appropriate to effectuate the intention of the

parties”].) And the additional requirement in this element that

third party enforcement be consistent as well with “the

reasonable expectations of the contracting parties” reflects the

teaching of prior California decisions that have denied

application of the third party beneficiary doctrine when

permitting the third party to maintain a breach of contract

GOONEWARDENE v. ADP, LLC

Opinion of the Court by Cantil-Sakauye, C. J.

20

action would not be consistent with the reasonable

expectations of the contracting parties. (See, e.g., Socoma

Companies, supra, 11 Cal.3d at pp. 402-403; Hess v. Ford

Motor Co., supra, 27 Cal.4th at pp. 526-528; Garcia v. Truck

Ins. Exchange, supra, 36 Cal.3d at pp. 436-438; see also

Eisenberg, supra, 92 Colum. L.Rev. at pp. 1375-1376, 1386-

1387.)

Perhaps this court’s two most prominent third party

beneficiary decisions are Lucas v. Hamm, supra, 56 Cal.2d 583,

and Socoma Companies, supra, 11 Cal.3d 394.

The issue in Lucas v. Hamm, supra, 56 Cal.2d 583, was

whether the intended beneficiaries of a will could sue the

attorney who had contracted with the testator to prepare the

will, when, after the testator’s death, the beneficiaries had not

obtained their intended inheritance because of the attorney’s

alleged failure to fulfill his contractual obligation to properly

prepare the will. In holding that the intended beneficiaries of

the will could sue the attorney for breach of contract under a

proper interpretation of California’s third party beneficiary

doctrine (and overruling an earlier decision that had reached a

contrary result), the court stated: “Since, in a situation like

those presented here . . . , the main purpose of the testator in

making his agreement with the attorney is to benefit the

persons named in his will and this intent can be effectuated, in

the event of a breach by the attorney, only by giving the

beneficiaries a right of action, we should recognize, as a matter

of policy, that they are entitled to recover as third-party

beneficiaries.” (56 Cal.2d at p. 590, italics added.) Because,

after the testator’s death, the testator was no longer available

to bring a breach of contract action against the attorney, it was

consistent with the objectives of the contract and the

GOONEWARDENE v. ADP, LLC

Opinion of the Court by Cantil-Sakauye, C. J.

21

reasonable expectation of the contracting parties to permit the

intended beneficiaries of the will to bring such an action at

that time to enforce the attorney’s alleged breach of the

contract. (See Eisenberg, supra, 92 Colum. L.Rev. at pp. 1393-

1394.)

On the other hand, in Socoma Companies, supra,

11 Cal.3d 394, our court, after reviewing the terms and the

circumstances underlying the formation of the government

contract at issue, concluded that the plaintiffs in that case,

who had participated in a job training program that had been

provided under the government contract but had not obtained

the promised employment contemplated by the contract, were

not entitled, under California’s third party beneficiary

doctrine, to bring a breach of contract action for damages

against the defendant companies that provided the job training

services. Although acknowledging that the plaintiffs “were

among those whom the Government intended to benefit

through defendants’ performance of the contracts” (id. at

p. 401), this court nonetheless concluded that the plaintiffs

were not entitled to sue the defendants for the defendants’

alleged breach of the contract because it would be inconsistent

with the objectives of the contract and the reasonable

expectations of the contracting parties to permit such third

party lawsuits. In reaching this conclusion, the court relied in

large part on a provision of the government contract that

established a specific administrative process through which

alleged breaches of the contract could be raised and resolved,

as well as on the inclusion of a liquidated damages clause in

the contract that restricted the defendant companies’ potential

liability under the contract. The Socoma Companies court

explained that “the contracts’ provisions for retaining the

GOONEWARDENE v. ADP, LLC

Opinion of the Court by Cantil-Sakauye, C. J.

22

Government’s control over determination of contractual

disputes and for limiting defendants’ financial risks indicate a

governmental purpose to exclude the direct rights [by

beneficiaries of the job training program] against defendants

claimed here.” (11 Cal.3d at p. 402; see Eisenberg, supra,

92 Colum. L.Rev. at pp. 1410-1412.)

With these precedents in mind, we examine the Court of

Appeal’s conclusion that the allegations of the 6AC are

sufficient, under California’s third party beneficiary doctrine,

to support a cause of action by plaintiff against ADP for ADP’s

alleged breach of its contract with Altour.

To begin with, it is important to note that in this case we

do not have before us the specific terms of the actual contract

between Altour and ADP. The 6AC simply alleges, on

information and belief, that Altour and ADP entered into an

unwritten contract under which ADP agreed to perform payroll

tasks for Altour for the benefit of both Altour and its

employees. Because of the present procedural posture of the

case — an appeal of a dismissal of the action against ADP after

the trial court sustained ADP’s demurrer to the 5AC without

leave to amend — we must assume the properly pleaded facts

contained in the 6AC are true. (See, e.g., Garton v. Title Ins. &

Trust Co. (1980) 106 Cal.App.3d 365, 375.) The 6AC does not

claim, however, that plaintiff was privy to the unwritten

contract allegedly entered into between Altour and ADP, and

the general allegation in the 6AC that the contract was for the

benefit of Altour’s employees as well as Altour leaves unclear

in what sense the contract was intended to benefit the Altour

employees.

GOONEWARDENE v. ADP, LLC

Opinion of the Court by Cantil-Sakauye, C. J.

23

In its opinion, the Court of Appeal referred to allegations

in the 6AC relating to statements on ADP’s website indicating

that ADP’s data processing system would make it possible for

employees easily to obtain information regarding their work

hour history, vacation benefits, and other employment related

data. If this is the benefit that the parties to the contract

allegedly intended to afford Altour’s employees, the 6AC does

not assert that plaintiff was denied such a benefit, and

plaintiff’s alleged failure to receive the wages she was due is

unrelated to this promised benefit. Accordingly, although the

Court of Appeal accurately observed that a third party’s rights

under the third party beneficiary doctrine may arise under an

oral as well as a written contract (see, e.g., Del E. Webb Corp.

v. Structural Materials Co. (1981) 123 Cal.App.3d 593, 606;

Lawrence v. Fox, supra, 20 N.Y. at p. 275), here the 6AC’s

allegations concerning the alleged benefit that the unwritten

contract between Altour and ADP allegedly conferred upon

Altour’s employees are too vague and conclusory to support the

proposition that the parties to the Altour/ADP contract

expressly or impliedly authorized Altour’s employees to

maintain a breach of contract action for unpaid wages against

ADP.

The Court of Appeal, in concluding that plaintiff may

maintain a breach of contract action against ADP on a third

party beneficiary theory, relied instead on the allegations that,

under ADP’s contract with Altour, ADP agreed to “take over”

all of Altour’s ordinary payroll tasks, including calculating the

wages Altour is obligated to pay each employee under the

governing labor statutes and wage orders and issuing

paychecks and pay stubs that reflect the correct wages.

(Goonewardene, supra, 5 Cal.App.5th at p. 173.) The Court of

GOONEWARDENE v. ADP, LLC

Opinion of the Court by Cantil-Sakauye, C. J.

24

Appeal stated that ADP’s obligations in this regard rendered

each employee of Altour a creditor beneficiary of the

Altour/ADP contract, on the theory that ADP’s role under the

contract was “to discharge” Altour’s wage obligations to its

employees. (Ibid.)

We conclude that the Court of Appeal erred in

characterizing plaintiff as a creditor beneficiary of the

Altour/ADP contract and permitting the breach of contract

action to go forward on this theory under the third party

beneficiary doctrine. Unlike past creditor beneficiary cases, in

which one party to the contract (the promisor) agreed to pay a

sum of money to a third party to discharge a preexisting debt

of the other party to the contract (the promisee) (see, e.g.,

Lawrence v. Fox, supra, 20 N.Y. 268; accord Calhoun v. Downs,

supra, 211 Cal. at pp. 770-771), here there is nothing to

suggest that ADP agreed to pay the wages that Altour owes to

its employees out of ADP’s own funds. Instead, as in most

employer/payroll company agreements,

6

it appears that ADP,



6 The Internal Revenue Manual describes a “payroll

service provider” in the following terms:

“1. A payroll service provider (PSP) is a third party that

can help an employer administer payroll and employment

taxes on behalf of an employer.

“2. An employer may enter into an agreement with a

PSP under which the employer authorizes the PSP to perform

one more of the following acts on the employer’s behalf:

“• Prepare the paychecks for the employees of the

employer.

“• Prepare Forms 940 and 941 for the employer using

the employer’s EIN.

GOONEWARDENE v. ADP, LLC

Opinion of the Court by Cantil-Sakauye, C. J.

25

under its contract with Altour, simply agreed to assist Altour

by calculating the amount of wages that Altour owes to each

employee in light of the applicable labor statutes and wage

order and providing the ministerial services of making out

paychecks and delivering the required pay information to each

employee. In the absence of an allegation to the contrary, we

must reasonably infer that the employees’ wages were paid by



“• File Forms 940 and 941 for the employer, which are

signed by the employer.

“• Make federal tax deposits (FTDs) and federal tax

payments and submit this information for the taxes reported

on the Forms 940 and 941.

“• Prepare Form W-3 and Forms W-2 for the employees

of the employer using the employer’s EIN.

“3. A PSP is not liable for an employer’s employment

taxes as either an employer or an agent.

“4. An employer’s use of a PSP does not relieve the

employer of its employment tax obligations or liability for

employment taxes.” (Internal Revenue Service, Internal

Revenue Manual 5.1.24.4.2 (Mar. 2018)

[as of Feb. 5,

2019].) (All internet citations in this opinion are archived by

year, docket number, and case name at

.)

See also Fogg, In Whom We Trust (2010) 43 Creighton

L.Rev. 357, 384 [“A typical contract between a payroll tax

provider and a small business entity might have the payroll

tax provider preparing payroll, paying payroll, preparing the

quarterly Form 941 form, and paying the Form 941 taxes. The

payroll provider typically has an agreement allowing it to

withdraw the necessary funds from the entity’s bank

account.”].)

GOONEWARDENE v. ADP, LLC

Opinion of the Court by Cantil-Sakauye, C. J.

26

funds provided by their employer, Altour, rather than ADP.

A payroll company’s provision of the type of assistance relied

upon by the Court of Appeal is quite distinct from agreeing to

“discharge” the obligations that Altour owes to its employees

under the applicable labor statutes and wage orders, as that

term has been used in prior third party beneficiary decisions.

(Cf. Rest.2d, Contracts, § 302(1)(a) & com. b, pp. 439-440.) For

this reason, we conclude that plaintiff is not properly viewed as

a creditor beneficiary of the Altour/ADP contract within the

meaning of the third party beneficiary doctrine.

We turn to the question whether plaintiff may bring its

breach of contract action under the three elements of

California’s third party beneficiary doctrine that we have

discussed above. (Ante, pp. 16-20.)

Even if we assume, without deciding, that an employer’s

hiring of an independent payroll company will in fact generally

benefit employees with regard to the wages they receive,

7 as



7 Even in the absence of the hiring of a payroll company,

an employee is entitled to receive the wages and wage

statements that are required under the applicable labor

statutes and wage orders and may sue his or her employer if

he or she does not receive them. (See, e.g., Lab. Code, § 1194.)

Although it is possible that a specialized payroll company may

do a better job than a small company in complying with the

applicable legal requirements, if the payroll company makes

the employer aware of applicable exceptions, restrictions or

other legal rules that were not known to the employer and that

operate to reduce the employer’s wage obligations to its

employees, the hiring of the payroll company may not in fact

benefit employees with regard to the wages they receive. Thus,

there may be some question whether such a contract will in

GOONEWARDENE v. ADP, LLC

Opinion of the Court by Cantil-Sakauye, C. J.

27

we have explained the fact that the employees will generally

obtain a benefit from the contract is not sufficient in itself to

authorize the employees to sue the payroll company under

California’s third party beneficiary doctrine. In addition, a

motivating purpose of the contracting parties must be to

provide such a benefit to employees. (See, e.g., Garcia v. Truck

Ins. Exchange, supra, 36 Cal.3d at p. 436 [“A putative third

party’s rights under a contract are predicated upon the

contracting parties’ intent to benefit him]”; Neverkovec v.

Fredericks (1999) 74 Cal.App.4th 337, 348 [“The circumstance

that a literal contract interpretation would result in a benefit

to the third party is not enough to entitle that party to demand

enforcement. The contracting parties must have intended to

confer a benefit on the third party”].)

When an employer hires a payroll company, providing a

benefit to employees with regard to the wages they receive is

ordinarily not a motivating purpose of the transaction.

Instead, the relevant motivating purpose is to provide a benefit

to the employer, with regard to the cost and efficiency of the

tasks performed and the avoidance of potential penalties.

Although the employer intends that the payroll company will

accurately calculate the wages owed to its employees under the

applicable labor statutes and wage orders, in situations in

which it may be unclear or debatable as to how the applicable

rules should be interpreted or applied, the employer would

reasonably expect the payroll company to proceed with the



fact generally provide a benefit to employees with regard to the

wages they receive.

GOONEWARDENE v. ADP, LLC

Opinion of the Court by Cantil-Sakauye, C. J.

28

employer’s interest in mind. In short, the relevant motivating

purpose of the contract is simply to assist the employer in the

performance of its required tasks, not to provide a benefit to its

employees with regard to the amount of wages they receive.

Moreover, even if a motivating purpose of such a contract

were to provide a benefit to employees with regard to wages

they receive, it still would not follow that the employees would

be entitled to sue the payroll company for breach of contract

under the third party beneficiary doctrine. As this court’s

decision in Socoma Companies, supra, 11 Cal.3d at pages 401-

402, teaches, even if a motivating purpose of the contracting

parties is to provide a benefit to the employees, it still may be

inconsistent with the objectives of the contract and the

reasonable expectations of the contracting parties to permit the

employees to sue the payroll company for an alleged breach of

the contract. (See Geis, Broadcast Contracting (2012) 106

Nw.U. L.Rev. 1153, 1195 [“There is an important analytical

distinction between contracting for a benefit to an outsider and

granting a right to sue for breach to that outsider”].)

In the present case, unlike in Lucas v. Hamm, supra,

56 Cal.2d 583, there is no need to permit a third party

employee to bring suit to enforce an alleged breach by ADP of

its obligations under the contract, because Altour is available

and is fully capable of pursuing a breach of contract action

against ADP if, by failing to comply with its contractual

responsibilities, ADP renders Altour liable for any violation of

the applicable wage orders or labor statutes. Simply put,

permitting an employee to sue ADP for an alleged breach of its

contractual obligations to Altour is not necessary to effectuate

the objectives of the contract.

GOONEWARDENE v. ADP, LLC

Opinion of the Court by Cantil-Sakauye, C. J.

29

Further, if a typical contract between an employer and a

payroll company were interpreted to authorize each of the

employer’s employees to sue the payroll company for any

alleged wage violation, such an interpretation would clearly

impose substantial additional costs on the payroll company in

light of the significant legal expense that would be entailed in

defending the numerous wage and hour disputes that regularly

arise between employees and employers. As a result, such an

interpretation would likely lead a payroll company to pass

these additional litigation costs on to the employer through a

higher price for its payroll services, an increased cost that an

employer would typically prefer to avoid. Thus, permitting

employees to sue a payroll company for alleged wage violations

would ordinarily be inconsistent with the reasonable

expectations of the employer as well as the payroll company

and also unnecessary because employees retain the right to

obtain full recovery for unpaid wages from their employer.

Accordingly, we conclude that a contract between an employer

and a payroll company should not be understood to permit the

employer’s employees to sue the payroll company for an alleged

breach of its obligations under its contract with the employer.

(Accord Lake Almanor Associates L.P. v. Huffman-Broadway

Group, Inc. (2009) 178 Cal.App.4th 1194, 1204 [where county

hires a consultant to prepare an environmental impact report

regarding a proposed development, the developer is not

entitled, under the third party beneficiary doctrine, to sue the

consultant for an alleged breach of contract in failing to timely

prepare the report].)

In sum, because providing a benefit to employees is

ordinarily not among the motivating purposes of a contract

between an employer and a payroll company, and because it

GOONEWARDENE v. ADP, LLC

Opinion of the Court by Cantil-Sakauye, C. J.

30

would be inconsistent with the objectives of the contract and

the reasonable expectations of the contracting parties to permit

the employees to sue the payroll company for an alleged breach

of its contract with the employer, we conclude that the Court of

Appeal erred in finding that the allegations of the 6AC are

adequate to state a cause of action for breach of contract by

plaintiff against ADP under the third party beneficiary

doctrine.

III. MAY PLAINTIFF MAINTAIN TORT CAUSES OF ACTION

AGAINST ADP FOR NEGLIGENCE

AND/OR NEGLIGENT MISREPRESENTATION?

In addition to finding that the allegations of the 6AC

supported plaintiff’s cause of action against ADP for breach of

contract under the third party beneficiary doctrine, the Court

of Appeal concluded that the allegations of the 6AC supported

causes of action against ADP for negligence and negligent

misrepresentation. The Court of Appeal identified no case

from California or any other jurisdiction in which an employee

has been permitted to maintain a tort cause of action for

negligence or negligent misrepresentation against a payroll

company hired by his or her employer, and, for the reasons

discussed hereafter, we conclude that neither of the proposed

negligence-based tort causes of action against ADP is valid.

A. Negligence Cause of Action

In Bily v. Arthur Young & Co. (1992) 3 Cal.4th 370, 397

(Bily), we explained that “[t]he threshold element of a cause of

action for negligence is the existence of a duty to use due care

toward an interest of another that enjoys legal protection

against unintentional invasion. [Citations.] Whether this

GOONEWARDENE v. ADP, LLC

Opinion of the Court by Cantil-Sakauye, C. J.

31

essential prerequisite to a negligence cause of action has been

satisfied in a particular case is a question of law to be resolved

by the court.” The existence or nonexistence of a common law

legal duty of care is a question of policy that, depending upon

the context, may turn on a court’s consideration of a variety of

factors. (See, e.g., Rowland v. Christian (1968) 69 Cal.2d 108,

113; Biakanja v. Irving (1958) 49 Cal.2d 647, 650 (Biakanja).)

As this court observed in Dillon v. Legg (1968) 68 Cal.2d 728, a

judicial conclusion that a legal duty exists in a particular

context is “ ‘only an expression of the sum total of those

considerations of policy which lead the law to say that the

particular plaintiff is entitled to protection.’ ” (Id. at p. 734,

quoting Prosser on Torts (3d ed. 1964) pp. 332-333.)

The threshold question here is whether ADP owed

plaintiff, an employee of Altour with whom ADP had no

contractual relationship, a common law duty of care with

respect to the loss that plaintiff allegedly sustained as a result

of ADP’s alleged negligence in the performance of its

contractual obligations to Altour.

In Biakanja, supra, 49 Cal.2d 647 — the initial decision

in which this court held that it may be appropriate to impose

tort liability in favor of a third party for a contracting party’s

negligent performance of a contract (see 6 Witkin, Summary of

Cal. Law (11th ed. 2017) Torts § 1327, p. 622) — the court

described some of the factors that may properly be considered

in deciding whether to recognize a tort duty of care to a third

party in the absence of privity of contract. We stated: “The

determination whether in a specific case the defendant will be

held liable to a third person not in privity is a matter of policy

and involves the balancing of various factors, among which are

the extent to which the transaction was intended to affect the

GOONEWARDENE v. ADP, LLC

Opinion of the Court by Cantil-Sakauye, C. J.

32

plaintiff, the foreseeability of harm to him, the degree of

certainty that the plaintiff suffered injury, the closeness of the

connection between the defendant’s conduct and the injury

suffered, the moral blame attached to the defendant’s conduct,

and the policy of preventing future harm.” (49 Cal.2d at

p. 650.) Subsequent California cases have identified other

policy considerations that may appropriately be considered in

determining whether a tort duty of care should be recognized

or imposed in the absence of privity of contract. (See, e.g., Bily,

supra, 3 Cal.4th at pp. 399-406 [considering whether

recognition of a duty of care on the part of auditors to potential

third party investors would (1) impose liability out of

proportion to fault, (2) be unnecessary in light of the prospect

of private ordering, and (3) would likely have an adverse effect

on the availability of audit services].)

Plaintiff argues that many of the factors identified in

Biakanja support imposing on a payroll company a duty of care

to an employee in this context because if a payroll company is

negligent in failing to properly calculate an employee’s wages

pursuant to the applicable labor statutes and wage orders, the

employee will suffer a foreseeable, direct, and readily

ascertainable economic loss and will be denied the protection

afforded by those remedial labor statutes and wage orders.

Plaintiff points out that California cases have repeatedly

emphasized the important role that such labor statutes and

wage orders play in protecting the rights of workers (see, e.g.,

Dynamex Operations West, Inc. v. Superior Court (2018)

4 Cal.5th 903, 952-953; Industrial Welfare Com. v. Superior

Court (1980) 27 Cal.3d 690, 702-703), and maintains that

therefore California’s public policy calls for the recognition in

this context of a tort duty of care on the part of a payroll

GOONEWARDENE v. ADP, LLC

Opinion of the Court by Cantil-Sakauye, C. J.

33

company to the employees of the company that hired the

payroll company.

Plaintiff is correct that employees unquestionably have

an important and fundamental interest in the accurate and

timely payment of wages as required by the applicable labor

statutes and wage orders. As we explain, however, we

conclude that a variety of policy considerations weigh against

the imposition upon a payroll company of a tort duty of care to

employees in this context.

First and perhaps most significantly, plaintiff’s argument

ignores the fundamental point that whenever a payroll

company’s negligence in calculating an employee’s wages

results in a violation of the applicable labor statutes or wage

orders, California law already provides the employee with a

full and complete remedy for any wage loss the employee

sustains as a result of the payroll company’s negligent conduct.

An employee’s interest in this regard is fully protected by the

employee’s well-established right under the labor statutes to

recover in a civil action against the employer the full wages

and other significant remedies (including attorney fees and

potential civil penalties) that are authorized under those

statutes. (See, e.g., Lab. Code, §§ 1194, 1197.1, 2699; Martinez

v. Combs, supra, 49 Cal.4th 35.) Given the employer’s clear

and direct liability for any wage loss caused by the payroll

company’s negligence in calculating the wages that are due,

the imposition of a separate tort duty of care on a payroll

company is generally unnecessary to adequately protect the

employee’s interests. (Cf. Cedars-Sinai Med. Center v.

Superior Court (1998) 18 Cal.4th 1, 11-13 [concluding

recognition of tort action for spoliation of evidence is

GOONEWARDENE v. ADP, LLC

Opinion of the Court by Cantil-Sakauye, C. J.

34

unwarranted in part because of the availability of adequate

alternative remedies].)

Second, imposing tort liability upon the payroll company

is not needed as a means of deterring negligent conduct on the

part of the payroll company. Under its contract with the

employer, the payroll company is already obligated to act with

due care in ensuring that the employer fulfills its obligations to

its employees under the labor statutes and wage orders. The

payroll company presumably will be liable to the employer if

the payroll company’s negligence in failing to comply with the

applicable labor statutes or wage orders results in the

employer being held liable in a suit brought by an employee

against the employer. Imposing on a payroll company a tort

duty to the employee will not appreciably increase the payroll

company’s incentive to avoid negligent conduct with respect to

its compliance with the applicable labor statutes and wage

orders.

Third, unlike other situations in which a tort duty of care

to third parties has been imposed (see, e.g., Heyer v. Flaig

(1969) 70 Cal.2d 223, 228-229), the payroll company has no

special relationship with the employer’s employees that would

warrant recognition of such a duty of care. (Accord Goodman

v. Kennedy (1976) 18 Cal.3d 335, 343-344.) As we have already

determined, under California’s third party beneficiary doctrine

plaintiff is not entitled to maintain even a breach of contract

action against defendant payroll company. (Ante, pp. 11-30.)

Given this conclusion, it would clearly be anomalous to impose

tort liability, with its increased potential damages (see, e.g.,

Ehrlich v. Menezes (1999) 21 Cal.4th 543, 550-551), upon the

payroll company based upon its alleged failure to perform its

obligations under its contract with plaintiff’s employer.

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Opinion of the Court by Cantil-Sakauye, C. J.

35

Fourth, the imposition on a payroll company of a duty of

care to an employee may improperly distort the payroll

company’s performance of its contractual obligations to the

employer in at least some circumstances. As already noted

(ante, pp. 27-28), in the wage and hour context, the respective

interests of an employer and an employee regarding the proper

interpretation and application of the applicable labor statutes

and wage orders are at times in conflict. When the meaning or

scope of a labor statute or wage order is ambiguous or

uncertain, imposing on the payroll company a tort duty of care

to an employee may adversely affect the payroll company’s

fulfillment of its contractual obligations to the employer. This

risk is particularly substantial because, as noted, the type of

damages that are generally available in a tort action include

items that are unavailable in a contract action, and, in

instances in which the meaning of a provision of a labor statute

or wage order is uncertain, the potential of greater liability

may induce the payroll company to place the employee’s

interests above those of the employer with whom the payroll

company has directly contracted.8



8

In a variety of contexts, California courts have held that

a professional or other business entity that enters into a

contract to provide services to an individual or entity does not

owe a tort duty of care to a third party with respect to an

economic loss allegedly incurred by the third party when

recognition of such a duty of care to the third party would

create a potential conflict of obligations for the professional or

business entity in light of its responsibility to the individual or

business with which it has contracted. (See, e.g., Summit

Financial Holdings, Ltd. v. Continental Lawyers Title Co.

GOONEWARDENE v. ADP, LLC

Opinion of the Court by Cantil-Sakauye, C. J.

36

Fifth and finally, imposition of a tort duty of care on a

payroll company is likely to add an unnecessary and

potentially burdensome complication to California’s increasing

volume of wage and hour litigation. Because an employee who

fails to receive what he or she believes is the proper amount of

wages due under the applicable labor statutes and wage orders

will generally have no way of knowing whether the

underpayment is due to the actions of the employer, the payroll

company, or both the employer and the payroll company, the



(2002) 27 Cal.4th 705, 716 [escrow holder did not owe duty of

care to third party when imposition of duty would subject

escrow holder to conflicting obligations]; Goodman v. Kennedy,

supra, 18 Cal.3d at p. 344 [attorney who advised client on stock

sale owed no duty of care to third parties who purchased stock

from the client]; Lake Almanor Associates L.P. v. HuffmanBroadway

Group, Inc., supra, 178 Cal.App.4th at pp. 1205-

1206 [environmental consultant hired by county to prepare

environmental impact report owned no duty of care to

developer of proposed project]; Ratcliff Architects v. Vanir

Construction Management, Inc. (2001) 88 Cal.App.4th 595, 606

[construction manager hired by school district to oversee

project owed no duty of care to third party architect who also

worked on the project]; Sanchez v. Lindsey Marden Claims

Services, Inc. (1999) 72 Cal.App.4th 249, 253 [independent

claims adjuster hired by an insurer to assess claimed loss owed

no duty of care to the insured claimant]; Burger v. Pond (1990)

224 Cal.App.3d 597, 605-606 [husband’s divorce attorney owed

no duty of care to husband’s subsequent wife]; Sooy v. Peter

(1990) 220 Cal.App.3d 1305, 1314 [attorney owed no duty of

care to another attorney representing a third party in armslength

transaction with attorney’s client]; Goldberg v. Frye

(1990) 217 Cal.App.3d 1258, 1269 [attorney representing

administrator of estate owed no duty of care to legatees of

will].)

GOONEWARDENE v. ADP, LLC

Opinion of the Court by Cantil-Sakauye, C. J.

37

payroll company is likely to be joined as an additional party in

virtually every wage and hour lawsuit, rendering such

litigation more complicated and more difficult to settle.

Inasmuch as an employee can obtain a full recovery for his or

her economic loss in a wage and hour action against the

employer alone, the substantial burden to the judicial system

that would result from the addition of a tort action against the

payroll company is likely to outweigh any potential benefit.

Considering the “ ‘sum total’ ” of the relevant

considerations of policy (Dillon v. Legg, supra, 68 Cal.2d at

p. 734), we conclude that it is not appropriate to impose upon a

payroll company a tort duty of care to an employee with

respect to the obligations imposed by the applicable labor

statutes and wage orders. Accordingly, we conclude that the

Court of Appeal erred in determining that plaintiff’s negligence

cause of action could go forward.

B. Negligent Misrepresentation Cause of Action

In addition to upholding plaintiff’s negligence cause of

action, the Court of Appeal held that the allegations of the 6AC

are adequate to support plaintiff’s proposed cause of action for

negligent misrepresentation. We conclude that the Court of

Appeal erred in this respect as well.

The numerous policy considerations that we have

discussed above in concluding that it is not appropriate to

impose on ADP a duty of care to support plaintiff’s negligence

cause of action are applicable as well to plaintiff’s cause of

action against ADP for negligent misrepresentation. Insofar as

ADP’s conduct in issuing to plaintiff inaccurate paychecks and

pay stubs would otherwise support an action for negligent

misrepresentation, any economic loss suffered by plaintiff can

GOONEWARDENE v. ADP, LLC

Opinion of the Court by Cantil-Sakauye, C. J.

38

be remedied in a statutory wage and hour cause of action

against her employer, and recognition of a negligent

misrepresentation cause of action against ADP is not needed to

deter the alleged negligent conduct on the part of ADP because

ADP already has a comparable incentive by virtue of its

potential contractual liability to plaintiff’s employer that would

result from such negligence. Further, permitting plaintiff to

pursue a negligent misrepresentation cause of action against

ADP in this context would have the same potential distorting

effect on ADP’s performance of its contractual obligations to

plaintiff’s employer and would introduce an unnecessary and

burdensome complication in virtually all wage and hour

litigation.

To our knowledge, the only case that has indicated that a

negligent misrepresentation cause of action may be permissible

even though a negligence cause of action has been rejected

because the relevant policy considerations weigh against the

recognition of a duty of care is Bily, supra, 3 Cal.4th 370. In

Bily, the court concluded, based upon a number of policy

considerations, that “an auditor’s liability for general

negligence in the conduct of an audit of its client[’s] financial

statements is confined to the client, i.e., the person who

contracts for or engages the audit services” and that the

auditor owes no duty of care to third parties who may have

relied on the audit report and thus such third parties may not

maintain a negligence action against the auditor. (3 Cal.4th at

p. 406.) At the same time, however, the court in Bily held that

a narrow class of third party users of audit reports may sue the

auditor for negligent misrepresentation so long as they “are

specifically intended beneficiaries of the audit report who are

GOONEWARDENE v. ADP, LLC

Opinion of the Court by Cantil-Sakauye, C. J.

39

known to the auditor and for whose benefit it renders the audit

report.” (Id. at p. 407.)

In permitting a negligent misrepresentation action to be

brought by persons who “are specifically intended beneficiaries

of the audit report who are known to the auditor and for whose

benefit it renders the audit report” (Bily, supra, 3 Cal.4th at

p. 407), the Bily decision clearly affords no support for

plaintiff’s proposed cause of action for negligent

misrepresentation in the present case. As our discussion of

plaintiff’s third party beneficiary claim explains, ADP’s

contract with Altour was not entered into for the benefit of

plaintiff or Altour’s other employees and plaintiff was not an

intended beneficiary of ADP’s services. (Ante, pp. 22-30.)

Thus, even under the narrow category of negligent

misrepresentation claims authorized in Bily, plaintiff’s

negligent misrepresentation claim lacks merit.

Accordingly, we conclude that the Court of Appeal erred

in permitting plaintiff’s cause of action for negligent

misrepresentation to go forward.

GOONEWARDENE v. ADP, LLC

Opinion of the Court by Cantil-Sakauye, C. J.

40

IV. CONCLUSION

For the reasons set forth above, the judgment of the

Court of Appeal is reversed insofar as it held that the trial

court erred in dismissing the causes of action for breach of

contract, negligence, and negligent misrepresentation without

leave to amend. The matter is remanded to the Court of

Appeal with directions to affirm the trial court judgment in

favor of ADP in its entirety.

CANTIL-SAKAUYE, C. J.

We Concur:

CHIN, J.

CORRIGAN, J.

LIU, J.

CUÉLLAR, J.

KRUGER, J.

IRION, J.*



* Associate Justice of the Court of Appeal, Fourth Appellate

District, Division One, assigned by the Chief Justice pursuant

to article VI, section 6 of the California Constitution.

See next page for addresses and telephone numbers for counsel who argued in Supreme Court.

Name of Opinion Goonewardene v. ADP, LLC

__________________________________________________________________________________

Unpublished Opinion

Original Appeal

Original Proceeding

Review Granted XXX 5 Cal.App.5th 154

Rehearing Granted

__________________________________________________________________________________

Opinion No. S238941

Date Filed: February 7, 2019

__________________________________________________________________________________

Court: Superior

County: Los Angeles

Judge: William P. Barry

__________________________________________________________________________________

Counsel:

Glen Broemer for Plaintiff and Appellant.

Morgan Lewis & Bockius, Robert A. Lewis, Thomas M. Peterson and Zachary S. Hill for Defendants and

Respondents.

Kevin C. Young for Pay-Net, Payroll World, Inc., Erie Custom Computer Applications, Inc., Task HR-VA

LLC, HCM Centric LLC, Adminasource, Inc., QTS Payroll Services, Inc., Promerio, Inc., and Payality,

Inc., as Amici Curiae on behalf of Defendants and Respondents.

Dowling Aaron Incorporated and Stephanie Hamilton Borchers for Payroll People, Inc., The Payroll Group

and Independent Payroll Providers Association as Amici Curiae on behalf of Defendants and Respondents.

Greines, Martin, Stein & Richland, Alana H. Rotter and Marc J. Poster for National Payroll Reporting

Consortium and American Payroll Association as Amici Curiae on behalf of Defendants and Respondents.

Foley & Lardner, Eileen R. Ridley, Yesenia Garcia Peres and Anthony James Dutra for Paychex, Inc., as

Amicus Curiae on behalf of Defendants and Respondents.

Counsel who argued in Supreme Court (not intended for publication with opinion):

Glen Broemer

347 Union #2

Jersey City, NJ 07304

(805) 351-9857

Robert A. Lewis

Morgan Lewis & Bockius

One Market Street, Spear Tower

San Francisco, CA 94105

(415) 442-1000

For the reasons set forth above, the judgment of the Court of Appeal is reversed insofar as it held that the trial court erred in dismissing the causes of action for breach of contract, negligence, and negligent misrepresentation without

leave to amend. The matter is remanded to the Court of Appeal with directions to affirm the trial court judgment in favor of ADP in its entirety.